January 9, 2023

By Harris L. Kempner, Jr., President


As has been the case over all of the last year, our overall economic concern has been whether or not the U.S. will be in recession sometime during the next 12 months. We correctly felt that 2022 would escape one. However, we presently analyze that we will indeed be in a relatively mild recession in the year 2023, probably beginning in the second quarter of the year.

There are many pervasive causes of weakness beginning to appear in the economy. Of extreme importance, interest rates have been raised seven times in the past twelve months by the Fed, and by a total of 4.25 basis points to a 4.50 level on Fed funds. Raising interest rates, particularly at this speed, are a jolt to the economy because they increase costs throughout. Further, the Fed seems determined to continue to raise rates until their inflation level is met. This is their major tool to fight inflation and they seem willing to accept an economic slowdown to further tame it. As perspective, the CPI has started to come down from 9.1% in June to 7.1% in November. But the Fed’s goal is 2.0%! This interest rate impediment to growth is the key reason we feel the economy will tip into recession in 2023. But also:

  1. There are still excess inventories of goods being sold at discounts and losses. This will continue throughout 2023, we believe.
  2. Corporate revenues are stalling out, and we feel this process will lead to more and more layoffs.
  3. The consumer has already pulled back some, mainly on big ticket items such as cars. This, we believe, will spread to services as well in 2023.
  4. New single housing construction, a major part of the overall economy, has gotten very weak and will continue even though there may be mitigating factors here as the year goes on.
But why a “mild” one? Because there are still some strengths in the economy.

  1. The primary strength is a continually tight labor market. The December unemployment numbers show an unemployment rate of only 3.5% which is very strong in terms of U.S. economic history. The rate is the lowest since 1969. This is true despite the headlines of cutbacks that we have seen so far, particularly in the high-tech industry. Incidentally, last year sported the second most jobs ever created in the United States in a single year – 4.5 million jobs. Second only to 2021 where 6.8 million jobs were created. Those who say we’ve been in a terrible economy for the last two years may need more of these facts.
  2. Corporations still have funds to spend, and will, on capital investments and in trying to retain, what have been very hard to get, workers.
  3. By most measurements, there are still excess personal savings, which will help consumers continue to spend in 2023, though more slowly than in 2022.
  4. Although individual family housing construction is very weak, there is considerable continuing strengths apparent in building multi-family dwellings, which offsets this to some extent.
However, all in, we feel the weaknesses listed above will overwhelm the continuing strengths sufficiently to lead to a mild recession in 2023.

There is one thing however, that hangs like a Sword of Damocles above the U.S. economy – the fact that it is even more likely than in 2011 that we will default on U.S. debt by not raising the debt ceiling. If that happens, and if any single short-term treasury bill is not paid, the trust that the U.S. will meet its full faith and credit obligations will be damaged severely, all bond prices will drop because higher interest rates will be demanded, the economy will be plunged into a deep recession – not a mild one – and we will rapidly lose our position as the world’s reserve currency, which underpins U.S. power. If we can’t pay our debts because of political wrangling once, the fear is that it will happen again. At all costs, Congress must avoid this.